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Beware tax burden on planning uplift

Landowners are increasingly benefiting from development uplift in land values – but must plan carefully to avoid hefty tax bills.

“The past 18 months have seen a flurry of farmers looking at developing land, following the radical change in planning rules in favour of development,” says Neil Cox, senior rural services manager at accountant Old Mill. “This, combined with delays among many local authorities to complete their Local Development Plan, means a number of parcels of land that previously would not have been identified for development have successfully secured planning permission.”

However, even where the farmer does not intend to seek planning permission, land that is suitable for development could carry a ‘Hope Value’. “This would boost values significantly above agricultural levels, triggering a substantial capital gain upon gift or sale of the land.”

While Capital Gains Tax (CGT) can sometimes be deferred, Hope Values can be more troublesome if not recognised during a farmer’s lifetime, potentially resulting in a hefty Inheritance Tax (IHT) burden. “Beneficiaries could end up paying 40% in IHT, as Hope Values are not eligible for Agricultural Property Relief,” says Mr Cox. “Fortunately, advance tax planning can avoid this problem in many circumstances.”

It is also increasingly commonplace - particularly in the case of renewable energy projects - for a landowner to enter into either an Option Agreement or a Promotion Agreement several years in advance of actually selling their land to a developer.

“However, there are some key CGT, IHT and VAT issues around the way arrangements are structured, which could cost landowners hundreds of thousands of pounds in the long term if correct advice is not taken.”

Under an Option Agreement the landowner agrees to sell the land for an agreed price at some point in the future, if called upon to do so by the buyer. Options are normally exercised only on the proviso that planning permission is obtained within a specified time frame, says Mr Cox. “This is generally a capital disposal, with the gain being charged to CGT.”

A Promotion Agreement is an arrangement under which an agent works with a landowner to maximise the land value in return for a percentage of the ultimate profits on sale to a developer. “The tax treatment on the resulting proceeds can differ substantially, depending on the precise nature and wording of the agreement, and there are pitfalls for the unwary,” he adds.

“In the worst case scenario, the profit could be treated as a trading transaction and charged to Income Tax at up to 45%, with the added liability of National Insurance contributions. Alternatively, it may be charged to CGT at slightly more palatable rates of up to 28%.”

Depending on what the asset has been used for during the landowner’s period of ownership, Entrepreneurs’ Relief may be available to reduce the rate of CGT to 10%, says Mr Cox. “The VAT implications of such transactions are also very complex, and can differ according to the nature of arrangement.

“Considering the substantial values associated with development land, and the fundamental importance in the detail of the legal agreements entered into, the difference between a 45% rate of tax and 28%, or even 10%, is significant, and high lights the importance of planning as early on in the process as possible.”